This is a really important topic, especially if you’re an entrepreneur. Of course, a big part of our job is making money and making systems that work so that we can turn a profit and do what we love for the rest of our lives (or for however long we want to be doing them). We want to lead a self determined life.

I see a lot of entrepreneurs who say that they budget and that they know what’s going on in their company, but what they’re actually doing is accounting. If you are categorizing transactions from your company after-the-fact, you’re accounting.

Budgeting is forward thinking. It is setting aside funds in order to purchase or create transactions for the future. Accounting is what you have done in the past. So if you are using software like QuickBooks or Wave, or even Mint, you’re accounting, and that is great. You have to do accounting in your business, and I am not here to diminish the value of accounting. It’s why we hire accountants.

So then, how do we budget? What’s more, how do you start getting into the mindset of budgeting?

Well, first of all, this is something that just is not taught to us. I think we all can agree that the American education system largely overlooks the fact that we need to manage money in our lives.

This is amplified when you start a business. Budgeting is even more critical when in business, and yet so many of us just never learned to do it. It took me years of being in business, years of entrepreneurship, to realize the difference between accounting and budgeting. And now that I do budget, my life and work is completely changed.

Okay, so then how do we budget well?

The system that has been around the longest is the envelope system. But most of you will cringe because the envelope system exists completely in cash. Another alternative is to budget manually by looking at your bank account and then allocate funds that way. But if you’re anything like me, you’ve got a lot of shit going on. So that’s going to be a pain in the ass.

There is an app I use, instead. Now, let me be clear, I am completely unaffiliated with this software. I use it, myself, and I love it. I suggest it to friends and clients but I receive nothing in return. In fact, they don’t even have an affiliate program at this time. So this suggestion is purely because I have found that this has worked for me and for my clients, and I believe it will work for you.

It’s called YNAB, or You Need A Budget. YNAB is an incredible app that is based on the original envelope system; setting aside certain amounts of cash into different categories for different different purchases in the future. So what YNAB does is it forces you to categorize all of the money that you have right now. Period.

As a reminder, accounting is categorizing past purchases. Budgeting is categorizing the money you currently have for the future. This means that one can spend confidently without the anxiety of wondering how a single purchase will affect the rest of the business.

Separation of Personal and Business

Now, if you have done your due diligence, setting up a budget (whether through YNAB or any other system) should be very straightforward because your business bank account should be separate from your personal. If they aren’t separate bank accounts, then you need to contact me and we need to discuss how to make sure that you business is secure and set up properly. This goes along with the concept of ‘piercing the veil’ — all liability needs to be owned by the business so that your personal assets are not at risk.

If you’re a younger entrepreneur, younger as in newer, it is likely that nobody has ever told you the difference between accounting and budgeting and you may not be doing it. If you feel like you’re constantly on a hamster wheel, you’re constantly racing to try to make ends meet, or if you run your business card and you’re not sure how that’s going to affect your company’s profit margin, you’re probably not budgeting. And it’s time.